Time to Pull the Trigger?
Still, many companies remain cautious about using their cash, even as it continues to pile up. Consider Time Warner Inc., whose cash rose from 3 percent of debt in 2001 to 12 percent in 2003. Thanks to cost cuts and debt reduction, its bonds and stock have rallied strongly, after being hit hard in the wake of the disastrous merger with AOL. In the past year alone, spreads over Treasuries on Time Warner debt due in 2012 have shrunk from 300400 basis points to less than 100, while the stock price has risen by 18 percent. To sustain the stock’s upward movement, however, equity investors now want management to undertake bold new moves.
Sure enough, in recent months Time Warner was rumored to be about to bid on both Metro-Goldwyn-Mayer Inc.’s movie studio and Adelphia Communications Corp.’s cable systems, which were expected to fetch as much as $4.7 billion and $20 billion, respectively. But nothing has come of those reports so far, and chairman and CEO Richard Parsons recently told Bloomberg News that the company was taking a wait-and-see approach with its cash.
True, the company’s AOL unit subsequently announced a $435 million all-cash deal for Advertising.com Inc., which provides expertise in online advertising, and the price represented a steep 36 times 2003 earnings. And observers who think Time Warner is being too conservative welcomed the deal. If nothing else, the company signaled that it was willing to invest in its Internet division at a time when skeptics were predicting its spin-off.
Yet a recent research report by Morgan Stanley comparing the bond- and equity-oriented sides of the credit market suggests that bond investors in Time Warner are showing fresh concern about such moves by the company. REL’s analysis may help explain why such concern exists, and why Time Warner is hesitant to pull the trigger on new blockbuster deals. The fact is, the company has a smaller proportion of excess cash to deploy than such peers as Fox Entertainment Group, and its return on capital during the past three years has been less than half of Fox’s. But that also means Time Warner’s potential return from using its excess cash to reduce capital would pale in comparison. So it comes as little surprise that the company seems content to let cash build further. As Parsons told Bloomberg, he would be comfortable paying down debt only “a little bit more.”
That hardly sounds like a complete good-bye to excess cash. And as CFO’s cash management scorecard shows, Time Warner isn’t alone in keeping its balance sheet in a highly liquid state.
Ronald Fink is a deputy editor of CFO.
To ask questions about REL Consultancy Group’s methodology, or to benchmark your own company using the REL methodology, visit www.relconsult.com.